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NOT BUILT IN A DAY

Italy’s red tape makes development a monumental task

By Barbara Hogan Galvin

If patience is a virtue, then any shopping center professional working or hoping to work in Italy must be of particularly noble stock.

With a quagmire of local legislation through which every developer and retailer must navigate, nearly impenetrable downtown districts, an absence of upscale malls and development timetables that average seven to 10 years, Italy is not the market for retail real estate professionals in a hurry.

Experienced foreign retailers and developers looking to enter the market have found the environment extremely challenging, and typically must partner with local landowners and builders in order to get projects developed, or acquire existing retail chains or individual shops to grow a chain or secure a prime location, experts said.

“There are opportunities in Italy, but many people have been overly optimistic about getting into the market,” said Tim Santini, director of asset management at Schroder European Property, London, which manages six Italian shopping centers. “There is potential there, but [foreigners] have to find a good local partner and be willing to go slowly.”

In many cases, retail developers in Italy must purchase a piece of land zoned for agriculture and then lobby local trade authorities to have the designation changed.

At the heart of Italy’s challenges are its planning and retailing regulations. In 1998, a new law administered by the Minister of Industry froze retail development for two years while countrywide legislation regulating it was being debated. This law, which requires that shopping center owners must have a license to build a mall and individual trading licenses for each retailer to actually sell goods, was decentralized, passing the authority to issue those licenses to the country’s 20 separate regional municipalities.

The move, which actually was intended to liberalize retailing, has been strictly interpreted by many local city councils, and has made the licensing process even more arduous, according to Marco De Stefani, a partner in the Bologna office of commercial property firm Healey & Baker.

“The one national law was long, but clear. Now, there are 20 different sets of laws which differ significantly. You need 20 sets of experts to interpret the laws for you if you are an operator and want to do business throughout the country.”

What’s more, zoning challenges add to an incredibly long development process.

Italy’s largest mall, I Gigli in Florence, is anchored by a Pam hypermarket, Media World electronics store and Italian department store Oviesse.

Commercially zoned property in desirable greenfield areas is a rarity, these days, said Corrado Vismara, director general of Italian activities for Larry Smith & Associates S.R.L., a Milan-based property management firm.

“It is not easy to obtain a building license due to the historical trends of traditional downtown retailing. New, out-of-town projects are not well regarded and seen as creating difficulties to traditional merchants,” he said.

In many cases, developers must purchase a piece of land zoned for agriculture and then lobby the local trade authorities to have the designation changed to allow retailing. That task can take as long as 10 years and is politically charged, he said, which makes the situation undesirable to foreign investors, developers and retailers. “It is not reasonable for an international company to wait 10 years to know if a mall will be developed,” he said.

This process has resulted in the slow growth of shopping center development — about a dozen small centers were built in 2000 — and a lack of overall retail product in the country, said De Stefani.

What’s more, historic downtowns are nearly ironclad fortresses to international chains looking to open flagship stores or a series of Main Street locations.

“Compared to other European countries, the market is growing very, very slowly,” Vismara said. “There are two faces of [Italy’s shopping center industry]. On the one face, all the retail companies say that they are all working on a large number of projects. But on the other face — in reality — few shopping centers are opening.”

Centro Commercial Carugate in Milan is typical of an Italian-style center.

Practically all of Italy’s retail development is retailer-led, primarily by hypermarket chains. Nearly 85% of the shopping centers in the country are hypermarket-anchored strip centers of about 20,000 square meters or less (210,400 square feet), which typically include about 30 to 50 small boutiques, according to Healey & Baker. Only 10 centers in the country of nearly 58 million residents top 40,000 square meters with the two largest, I Gigli in Florence, measuring 68,000 square meters and Shopville Le Gru in Turin, at 60,000 square meters.

There are only a handful of “U.S.A. or U.K.-style” developers in the country, said De Stefani, notably Essediesse S.P.A., in Milan and Coopsette S.P.A., based in Bologna. For the most part, hypermarket retailers secure the land, have the center constructed and lease out the small-shop space themselves.

In some instances, the small shops are sold “condominium-style” by the hypermarket/developer in order to raise money for the project. In those cases — typically in very small centers — the boutique operator owns the piece of the mall in which they trade, De Stefani said. Dominant hypermarket chains include national operators Gruppo Pam, GS and Coop, plus international chains Sea and Carrefour, he said.

Additional big-box tenants typically anchor the hypermarket centers, with superstores like IKEA, French consumer electronics chain Fnac, Italian-based home-improvement retailer Castorama and sporting goods outlets like Italy’s Giacomelli Sport and France’s Decathlon topping the list of popular category-killer tenants these days.

The challenge faced by many retail leasing agents is that many of the malls that link the strip centers’ anchors are similar in concept and design and don’t offer the excitement, or simply the space, that many international retailers are looking for, Santini said. “The centers are built by hypermarket [operators] for hypermarkets. The malls just haven’t been a priority,” he said.

The retail mix at these centers consists primarily of independent operators — far more than in other European countries — with very few chains, said Santini. And many of these independent merchants have “dug their heels in,” he said, making for a tight market and little turnover. Depending on the local legislation, either a mall’s landlord owns each tenant’s trading license and sets the length of a lease, or the tenant acquires the license, which allows them to remain in a center for 12 years.

“It’s made it quite hard work for foreign chains to grow,” Santini said.

Schroder tries to keep its retail leases at about five to seven years — it makes for a “pretty dry” mix if no new concepts are available at a center, he added. Typically foreign retailers must buy up small chains or pay “entry premiums” to individual retailers for their existing locations to establish multiple sites, he added.

Consequently, Italy is lacking some of the world’s best-known and most successful retailers, such as The Gap, Banana Republic, Mango and Zara.

What’s more, the discount-oriented hypermarket-based centers are barriers to high-end fashion retailers such as Prada, Gucci and Trussardi, which find that these malls are not upscale enough for their customers or their merchandise, said Vismara. Those retailers typically stick with boutiques in some of the hottest main streets in Milan, Venice and Rome, he said.

That doesn’t mean that there’s a lack of good retailers to be found at the malls, Santini said. In fact, Italian retailers have become “increasingly sophisticated” in the last decade and are “very good at listening to what their customers want.”

According to industry experts, some of the country’s hottest retail chains include Italian operators Benetton, Piazza Italia, Motivi and Oltre (“these are the chains that Zara and The Gap have to fight against,” Santini said), America’s Foot Locker and The Disney Store and French fashion retailers Etam and Pimkie.

In order to attract even more top retailers from around the globe, a new generation of shopping centers is beginning to come onto the market. Most are still anchored by hypermarkets, but they also contain leisure components and are designed and managed with retail excitement in mind.

One such project under development is Otto Gallery, a mixed-use center scheduled to open in Turin next March with a 35,000-square-meter mall, food court, 11-screen cinema and two hotels. The center is being developed by Lingotto, Turin, and will be managed by Larry Smith.

“The idea is to create the downtown quality of life — with boutiques and pedestrian walking areas — with all the amenities of a shopping center, like good access and car parking and climate control,” Vismara said. Also, he is hopeful that this new type of center will draw upscale tenants not typically found at traditional malls.

In 1999, Schroder bought I Gigli, the largest center in the country. This center is “a proper regional center,” according to Santini. “These second-generation malls are being properly designed and marketed, and they are blossoming. Developers are realizing that in addition to the hypermarket, the mall can be quite lucrative and has potential in its own right.” The center is anchored by a Pam hypermarket, Media World electronics big-box store, Italian department store Oviesse and 120 specialty shops.

New centers without hypermarket anchors seem to be viewed as having less of an impact on traditional downtown retailers, and therefore are easier to develop, according to Vismara. “Easier, but not easy,” he said. However, there is fear that the current popularity of leisure-based centers has touched off a flurry of applications to build clones all over the country.

“We hear that there are hundreds of license applications for multiplex centers currently in the pipeline,” Vismara said.

Future development opportunities lie in the refurbishment or expansion of existing centers, particularly in the northeast areas like Padova and Venice, or the redevelopment of industrial or “brownfield” regions, Santini said — especially now, as choice parcels of land are rare and expensive. “There are no bargains out there these days, that’s for sure, whether you’re a developer buying land, or an investor looking to buy a shopping center.”

 

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